McD's dollar menu no bargain for franchisees

(Crain's) -- With sky-high commodity costs, an increase in minimum wage and consumers trading down to lower-price items, McDonald's owner/operators are starting to push back on the dollar menu credited with much of the chain's turnaround.

Several New York stores have stopped offering the dollar menu, and in one Texas market, franchisees voted down local funding to advertise the dollar menu this coming September. They're looking to support higher-margin items instead.

McDonald's has answered by testing the double cheeseburger, the cornerstone of its value platform, for $1.09 in about 50 restaurants in Georgia and Mississippi. But the unrest is more widespread than that.

"The value menu as an everyday-value proposition is probably not a bad thing," said Ed Bailey, a franchisee with 63 restaurants in the Dallas area. "But when you begin to advertise it and make it your marketing campaign, encouraging franchisees to do it because transactions are slipping and comp sales are slipping," there are problems, he said.

The dollar menu also accounts for a considerable portion of McDonald's $810 million measured media buy. Mr. Bailey estimated the chain probably spends $100 million of that advertising the value menu.

These days, Mr. Bailey said, the chain is pushing to boost transactions and same-store sales, with little regard for franchisees' bottom lines. McDonald's U.S. same-store sales have been less impressive than rival Burger King's in recent months.

Mr. Bailey blamed food costs, a minimum-wage increase and more consumers trading down to the dollar menu from premium-price items. Greg Watson, VP-marketing at McDonald's USA, said while the Southern-market tests of the $1.09 double cheeseburger were granted at franchisees' behest, they have less to do with commodity costs than a test of price elasticity. He also noted that double cheeseburgers have been tested in different markets for as high as $1.29, and occasionally with toppings for as much as $1.99, but the fast feeder generally has found $1 to be the sweet spot for the sandwich.

McDonald's CEO Jim Skinner said in a press conference earlier this month that 90% of franchisees still offer the double cheeseburger for $1. But given the environment, he said, "we owe it to our owner/operators," to keep testing the waters on price.

Burger King recently pulled a test of a double cheeseburger for $1. A spokeswoman for the company declined to comment on the reason.

Dollar-menu sales in the U.S. are now roughly 15% of sales, on the high end of the 13%-to-15% range that's been typical during the past five years. Mr. Watson said these shifts are seasonal and do not reflect the economy. Mr. Bailey, however, said dollar-menu sales have absolutely increased with the downturn but couldn't quantify the shift.

Mr. Bailey called McDonald's efforts to keep the dollar menu in place and its push for advertising "reprehensible." In a meeting last week with Dallas franchisees, he said McDonald's executives told them that consumers who buy dollar double cheeseburgers go on to buy three more items. But he found a problem with the math: the average check was just $4.42. "That means the other items they're buying are from the value menu," he said.

Mr. Bailey said he expects the corporation to see similar pushback in other markets.

Bill Brown, a Lancaster, Pa., franchisee who chairs the company's value task force and is a member of the national advertising committee, brushed aside the regional-advertising issue, adding that the value platform is generally pushed as part of the national ad budget. "We tend to use local advertising for a more specific message, things like average-check builders, things that raise awareness to certain products," he said.

Mr. Brown said the double cheeseburger is important to the chain's success and "very important to the growth of our business."

But it doesn't make sense in every market. Irwin Kruger, a 40-year McDonald's franchisee with locations in Times Square and Madison Square Garden, said he offered the dollar menu for years but saw his sales slip and pulled it.

"By offering the dollar-menu products that were being offered nationally, our average check went down because customers were trading down to the more attractive prices, but we were not attracting enough new customers to make up the difference," he said.

Mr. Kruger said McDonald's put pressure on stores to keep the dollar menu. "The operators are extremely worried about the current cash-flow position."

McDonald's spokeswoman Danya Proud said despite differences of opinion, the organization is dedicated to working with franchisees.

"We don't always agree, but there's always a discussion, because we've got to make decisions that are in the best interest of the brand," she said. "It's very important that these decisions are made together. When franchisees make money, McDonald's makes money, and McDonald's USA makes money when the restaurants make money."